CP

Business Context and Reporting Period

Company: Canadian Pacific Kansas City Limited (CPKC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2026
Business Overview: CPKC operates a transcontinental freight railway spanning Canada, the U.S., and Mexico, transporting bulk commodities, merchandise, and intermodal traffic across approximately 20,000 miles.

Key Financial Metrics

Note: Debt figures derived from Balance Sheet line items "Long-term debt maturing within one year" and "Long-term debt".

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 2% to $3,701 million. Freight revenues fell 3% to $3,628 million, driven by lower freight revenue per revenue ton-mile (RTM) due to unfavorable foreign exchange (FX) rates ($81 million impact) and lower fuel surcharge revenue ($40 million impact) following the elimination of the Canadian federal carbon tax program.
• Profitability: Net income decreased 7% to $846 million. Diluted EPS declined 3% to $0.94. The Operating Ratio increased 70 basis points to 66.0%.
• Cost Management: Total operating expenses decreased 1% to $2,443 million. Fuel expenses dropped 5% to $458 million due to lower carbon tax expenses and purchasing discounts. Compensation and benefits increased 1% to $691 million due to wage inflation and stock-based compensation, partially offset by headcount reductions.
• Operational Volume: Gross ton-miles (GTMs) increased 2% to 100,625 million, while train miles decreased 2% to 11,523 thousand, indicating improved train productivity and fuel efficiency (1.043 gallons/1,000 GTMs).

Guidance, Outlook, and Risks

• Dividend Increase: On April 28, 2026, the Company declared a quarterly dividend of $0.268 per share, a 17.5% increase from the prior quarter's $0.228.
• Share Repurchases: The Company announced a Normal Course Issuer Bid (NCIB) on January 28, 2026, to purchase up to 44.9 million shares. In Q1 2026, it repurchased 5.74 million shares for $646 million.
• Debt Activity: Issued $1.2 billion in new long-term notes (3-year and 30-year maturities) and repaid $250 million in maturing notes. Expanded commercial paper program capacity to $2.2 billion.
• Tax Outlook: The Core adjusted effective tax rate for 2026 is expected to be approximately 24.75%.
• Key Risks & Contingencies:
  • 2014 Tax Assessment: A Mexican tax assessment of approximately $518 million (CAD) remains in litigation. An injunction against enforcement is currently in place pending further appeals.
  • Lac-Mégantic Litigation: The Company continues to defend various claims related to the 2013 derailment. Recent court decisions have been favorable, including a summary judgment dismissal in the U.S. bankruptcy estate case and an appellate victory in Canada, though some appeals to the Supreme Court of Canada are pending.
  • Remington Development Claim: A $165 million judgment against the Company was set aside by the Alberta Court of Appeal in July 2025, ordering a new trial.

Investor Verification Checklist

• FX Sensitivity: Verify the impact of the strengthening Canadian dollar on future revenue translation, as Q1 2026 results were negatively impacted by $82 million in FX translation.
• Carbon Tax Impact: Confirm the long-term effect of the elimination of the Canadian federal carbon tax on fuel surcharge revenues and operating expenses.
• Legal Exposure: Monitor the status of the 2014 Mexican tax assessment and the Remington Development Corporation appeal to the Supreme Court of Canada.
• Capital Allocation: Track the execution of the new $44.9 million share repurchase program and the timing of dividend payments.
• Non-GAAP Reconciliation: Review the reconciliation of Core Adjusted EPS ($1.04) to GAAP EPS ($0.94) to understand the impact of KCS purchase accounting and acquisition-related costs.